Rebuttal: Will Brexit really cost more than COVID?

covid economy

Addressing the assumptions behind projections of long-term economic decline.

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The governor of the Bank of England, Andrew Bailey, has recently suggested in an interview with the Commons Treasury Committee that a No-Deal Brexit would have more of an impact than the Coronavirus pandemic in the long run, contradicting the emphasis of the Chancellor, Rishi Sunak, on the larger relative significance of the pandemic.  Given the context, Bailey didn’t provide figures in support of his statement, but the suggestion echoes that of an LSE report earlier this year, which itself depends on an analysis of the economic impact of Brexit published by the Treasury in 2018.

As we’ve suggested before, however, these predictions are characterised by a number of problems.  Notably, the government has itself subsequently abandoned these estimates for good reason.  The Treasury figures in particular are marred by an overly pessimistic estimation of the benefits to be gained from new trade deals, overly optimistic assumptions about the likely growth of EU countries due to continuing integration, and a failure to account for the regulatory efficiencies which Brexit will enable.

In particular, the relative speed with which Britain will be able to conclude new deals (demonstrated by the substantial number of rollover agreements the government has thus far secured) contrasts with the EU’s tardiness in ratifying agreements, with all the member states needing to be individually placated.  They also presume that no new deal would be negotiated after an initial No Deal scenario, and rely overly on the assumption that the trade between two countries is a function of their relative distance (the so-called ‘gravity model’) rather than factors such as specialisation, institutional suitability and so on.

In short, therefore, such predictions of woe form a familiar – if nonetheless unwelcome – feature of Brexit-related alarmism.

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Briefings For Britain